OFFICE OF THE NEW YORK STATE COMPTROLLER
Thomas P. DiNapoli • State Comptroller
Fiscal Stress Close-Up
Fixed Costs
Fixed costs are expenditures that are required and recurring. Both individuals and governments often find that
much of their spending goes toward fixed costs. Similar to an individual who has certain costs that are difficult
to reduce and control such as a vehicle loan, a home mortgage or rent, local governments also have fixed
costs that must be paid, regardless of other priorities or problems.1
An individual who goes through a difficult financial period may look to try to reduce expenses, but this will
usually involve eliminating nonessential purchases or putting off purchases that are not urgent. Required
and recurring costs can only be reduced to a limited degree, or with considerable sacrifice. When local
governments need to reduce spending, they look to make similar adjustments in their budgets, cutting more
flexible items. Once a local government has maximized these types of reductions, however, the remaining
fixed costs will make up a larger proportion of what remains. As a result, the local government will then have
reduced budget flexibility, so that any additional needed cuts may likely affect essential services.
This close-up focuses on two kinds of fixed costs, debt service and personal services costs. Debt service
is the amount necessary to pay principal and interest on a local government's bonds and notes. Defaulting
on debt service payments is likely to have serious consequences on credit ratings, the ability to borrow and
the local government’s finances in general. Costs for personal services – salaries, wages and benefits – can
also be reduced, but reductions in staff may reduce the ability of
a local government to perform necessary functions, and must
take into account collective bargaining agreements or other
employment contracts.
Fixed
Costs
Short-Term
Debt
Cash/
Liquidity
FISCAL STRESS
INDICATORS
• High Debt Service Expenses
• High Personal Service and Employee Benefit Costs
Fund
Balance
Operating
Deficit
Division of Local Government and School Accountability
Fixed costs is one of five categories of indicators for the Office of the State Comptroller’s (OSC’s) Fiscal
Stress Monitoring System (FSMS).2 The FSMS defines fixed costs as either:
• Debt service as a percentage of revenues; or
• Personal services (salaries and wages) and employee benefits as a percentage of revenues.
Local governments borrow for various purposes, including the funding of long-term infrastructure
construction or improvement projects, so some level of debt service costs is normal. Under OSC’s
FSMS, the threshold for high debt service costs is 10 percent of total revenues, with any level over 20
percent receiving maximum FSMS points.
Since every local government provides various services, it is to be expected that a fairly large proportion
of local expenditures will be on associated costs for personal services and employee benefits. The
threshold in the FSMS for high personal service and employee benefit costs is 65 percent of total
revenues, with anything over 75 percent assigned the maximum FSMS points. Increases in employee
benefit costs in recent years (including things like health insurance and pension fund payments) have
been a significant factor driving increases in total fixed costs for local governments.
Fiscal Stress Monitoring System (FSMS): What Does It Measure?
“Fiscal stress” refers to the difficulties in generating enough revenues to meet expenditures in the long term.
OSC’s FSMS measures a local government’s ability to balance its budget, pay its bills, keep its debt in check
and have some funds left over at the end of the fiscal year. It does not measure the quality or quantity of
services provided, their cost-efficiency or how hard local officials have worked to achieve this balance given the
local economic climate.
FSMS has five categories of indicators: fund balance, liquidity, short-term debt, operating deficits, and fixed
costs. These indicators contribute to a local government’s final classification of Significant Stress, Moderate
Stress, Susceptible to Stress or No Designation. More information on the scoring system for each of the
indicators can be found in OSC’s “Fiscal Stress Monitoring System” report.
This report, which focuses on fixed cost indicators, is one of a series examining each of the five FSMS
indicator categories. These reports will discuss the circumstances under which a high score in any category
is cause for concern.
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Office of the State Comptroller
How common are high fixed costs?
High fixed costs are common for
school districts, which devote a
large share of their expenditures to
personnel, and also for other local
governments that provide services
associated with high personnel costs,
such as public safety. Since there
is not much variation in the level of
fixed costs across school districts,
fixed cost indicators were not used to
evaluate fiscal stress in the FSMS for
schools. However, a look at personal
service costs and debt service costs
show quite a different picture for the
other classes of government.
Cities usually have high personal
service and benefit costs because
they typically are responsible for
providing a set of services that are
more labor intensive (police and
fire departments, for instance) than
those delivered by towns and most
villages. About one-third of all cities
exceeded the FSMS threshold for
high personal service and employee
benefit costs (greater than 65
percent of revenue). The median
city had personal service and
employee benefit costs that equaled
63 percent of revenues. Only about
1 percent of towns had comparably
high personal service and employee
benefit costs, while 6 percent of
villages had high personal service
and employee benefit costs.
Percentage of Local Governments with High Fixed Costs,
By Class, Fiscal Year Ending 2013
High Personal Service Costs
High Debt Service Costs
44%
33%33%
16%
6%
1%
0% 0%
Counties
(N=54)
Cities (N=52)
Towns
(N=873)
Villages
(N=496)
Source: Office of the State Comptroller (OSC).
Fixed Cost Indicators: Performance by Type of Local Government
and Fiscal Stress Status for the Fiscal Year Ending in 2013
Class
Number
of Local
Governments
Scored
Median 3-Year
Average of
Personal Services
and Employee
Benfits as a
Percentage of
Revenues
Median 3-Year
Average
of Debt
Service as a
Percentage of
Revenues
Counties
54
40%
3%
10
44
40%
40%
4%
2%
52
63%
8%
7
45
57%
63%
15%
8%
873
42%
4%
17
856
54%
42%
5%
4%
496
38%
8%
16
480
42%
38%
10%
8%
In Fiscal Stress
No Designation
Cities
In Fiscal Stress
No Designation
Towns
In Fiscal Stress
No Designation
Villages
In Fiscal Stress
No Designation
Total
1475
In Fiscal Stress
No Designation
50
1425
Source: OSC. "In Fiscal Stress" includes all three levels of fiscal stress:
significant, moderate and susceptible.
Division of Local Government and School Accountability
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Villages are most likely to exceed the FSMS threshold for debt service, with 44 percent above that level
(greater than 10 percent of revenue); the median village has debt service equal to 8 percent of revenues.
Cities also tend to have high debt service costs, with about one-third exceeding the FSMS threshold.
The median city in fiscal stress has debt service costs of 15 percent of revenues. For towns, 16 percent
exceed the FSMS threshold; the median town has debt service equaling 4 percent of revenues.
No counties had high enough fixed costs to score any FSMS points. This is likely because a large part
of a county’s budget is devoted to Medicaid, which is jointly funded by the federal and State government
and passes through the county with relatively low local personnel costs. The median county has
personal service and employee benefit costs that account for about 40 percent of revenue, and debt
service equal to 3 percent of revenue.
Personal Service Cost Containment
In 2008, the Office of the State Comptroller released a publication on Personal Service Cost Containment as part
of the Local Government Management Guide (LGMG) series. This publication offers ideas on containing certain
personal service costs. The LGMG breaks down options for reducing personnel costs in the following areas:
• Health Insurance Costs. Employers can try to reduce costs by:
• Bringing in competition,
• Offering cash payments in lieu of health insurance,
• Offering a self-insurance health plan,
• Offering a pre-tax benefit plan, and
• Providing health and wellness programs.
• Unemployment Insurance Costs. Savings can be found through the employer selecting the most
economical funding method, either through a tax contribution method or a benefit reimbursement method.
• Workers Compensation Costs. Employers can:
• Manage costs by seeking out competition,
• Assess for accuracy of existing job classification and the apportionment of gross wages and salaries,
• Emphasize prevention of accidents, and
• Establish strong claims procedures.
• Overtime Planning and Management. In particular, the use of alternative work schedules can be beneficial.
For more information, see the OSC publication:
http://www.osc.state.ny.us/localgov/pubs/lgmg/costcontainment08.pdf.
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Office of the State Comptroller
Why are high fixed costs considered a symptom of fiscal stress?
When fixed costs begin to comprise an exorbitant portion of a budget, the ensuing loss of financial
flexibility can signal an upcoming inability to respond to changes in policy, unexpected events, or swings
in the economy. For example, high debt service costs may be an indication that the local government
is borrowing more than it can easily pay back. Excess debt, and the associated interest costs, can lead
to cash flow problems and difficulty meeting other obligations, such as payroll. Other high fixed costs,
such as personal service and employee benefit costs, in many ways can be considered part of doing
business for some local governments. However, when they become too high they diminish the ability of
governments to react to changing economic circumstances. The manageable level of fixed costs varies,
and can depend on the local cost of living and the tax base, among other circumstances.
Are high fixed costs ever justifiable?
Some regions have higher personnel and equipment costs than others areas. These higher costs
might not be related to municipal fiscal stress but could still present a financial challenge. For example,
downstate municipalities (Westchester County and Long Island, especially) have a higher cost of living
than the rest of the state. Therefore, salaries and employee benefits would also tend to be higher.
Nevertheless, the required and recurring nature of these costs tend to make it more difficult for these
local governments to deal with any other stress factors, should they arise.
Division of Local Government and School Accountability
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Notes
6
1
“Local governments,” as used in this report refers to counties, cities, towns, villages and school districts, and
does not include New York City.
2
The FSMS financial indicators are calculated using data filed by local governments in annual update
documents (AUDs) and by school districts in annual financial reports (ST-3s). All FSMS results presented
in this report relate to the fiscal years ending between December 31, 2012 and July 31, 2013. FSMS points
are assigned based on the resulting percentage for each indicator; high scores signify fiscal stress. The
fixed costs indicators carry a weight of 10 percent in the calculation of a local government’s fiscal stress
score. For more detail on the FSMS indicators, visit the Comptroller’s Fiscal Stress Monitoring website:
http://www.osc.state.ny.us/localgov/fiscalmonitoring/index.htm.
See also, OSC, Fiscal Stress Monitoring System,
http://www.osc.state.ny.us/localgov/pubs/fiscalmonitoring/pdf/fiscalstressmonitoring.pdf.
Office of the State Comptroller
Division of Local Government and School Accountability
Central Office Directory
Andrew A. SanFilippo, Executive Deputy Comptroller
(Area code for the following is 518 unless otherwise specified)
Executive .................................................................................................................................................................................. 474-4037
Gabriel F. Deyo, Deputy Comptroller
Nathaalie N. Carey, Assistant Comptroller
Audits, Local Government Services and Professional Standards................................................................. 474-5404
(Audits, Technical Assistance, Accounting and Audit Standards)
Local Government and School Accountability Help Line............................................. (866) 321-8503 or 408-4934
(Electronic Filing, Financial Reporting, Justice Courts, Training)
New York State & Local Retirement System
Retirement Information Services
Inquiries on Employee Benefits and Programs................................................................................474-7736
Bureau of Member and Employer Services............................................................ (866) 805-0990 or 474-1101
Monthly Reporting Inquiries..................................................................................................................474-1080
Audits and Plan Changes.........................................................................................................................474-0167
All Other Employer Inquiries................................................................................................................. 474-6535
Division of Legal Services
Municipal Law Section ....................................................................................................................................... 474-5586
Other OSC Offices
Bureau of State Expenditures ........................................................................................................................ 486-3017
Bureau of State Contracts.................................................................................................................................. 474-4622
Office of the State Comptroller,
110 State Street, Albany, New York 12236
email: [email protected]
Mailing Address
for all of the above:
Division of Local Government and School Accountability
7
Division of Local Government and School Accountability
Regional Office
Directory
Andrew A. SanFilippo, Executive Deputy Comptroller
Gabriel F. Deyo, Deputy Comptroller (518) 474-4037
Nathaalie N. Carey, Assistant Comptroller
Cole H. Hickland, Director • Jack Dougherty, Director
Direct Services (518) 474-5480
BINGHAMTON REGIONAL OFFICE - H. Todd Eames, Chief Examiner
State Office Building, Suite 1702 • 44 Hawley Street • Binghamton, New York 13901-4417
Tel (607) 721-8306 • Fax (607) 721-8313 • Email: [email protected]
Serving: Broome, Chenango, Cortland, Delaware, Otsego, Schoharie, Sullivan, Tioga, Tompkins counties
BUFFALO REGIONAL OFFICE – Jeffrey D. Mazula, Chief Examiner
295 Main Street, Suite 1032 • Buffalo, New York 14203-2510
Tel (716) 847-3647 • Fax (716) 847-3643 • Email: [email protected]
Serving: Allegany, Cattaraugus, Chautauqua, Erie, Genesee, Niagara, Orleans, Wyoming counties
GLENS FALLS REGIONAL OFFICE - Jeffrey P. Leonard, Chief Examiner
One Broad Street Plaza • Glens Falls, New York 12801-4396
Tel (518) 793-0057 • Fax (518) 793-5797 • Email: [email protected]
Serving: Albany, Clinton, Essex, Franklin, Fulton, Hamilton, Montgomery, Rensselaer, Saratoga, Schenectady, Warren, Washington counties
HAUPPAUGE REGIONAL OFFICE – Ira McCracken, Chief Examiner
NYS Office Building, Room 3A10 • 250 Veterans Memorial Highway • Hauppauge, New York 11788-5533
Tel (631) 952-6534 • Fax (631) 952-6530 • Email: [email protected]
Serving: Nassau, Suffolk counties
NEWBURGH REGIONAL OFFICE – Tenneh Blamah, Chief Examiner
33 Airport Center Drive, Suite 103 • New Windsor, New York 12553-4725
Tel (845) 567-0858 • Fax (845) 567-0080 • Email: [email protected]
Serving: Columbia, Dutchess, Greene, Orange, Putnam, Rockland, Ulster, Westchester counties
ROCHESTER REGIONAL OFFICE – Edward V. Grant Jr., Chief Examiner
The Powers Building • 16 West Main Street – Suite 522 • Rochester, New York 14614-1608
Tel (585) 454-2460 • Fax (585) 454-3545 • Email: [email protected]
Serving: Cayuga, Chemung, Livingston, Monroe, Ontario, Schuyler, Seneca, Steuben, Wayne, Yates counties
SYRACUSE REGIONAL OFFICE – Rebecca Wilcox, Chief Examiner
State Office Building, Room 409 • 333 E. Washington Street • Syracuse, New York 13202-1428
Tel (315) 428-4192 • Fax (315) 426-2119 • Email: [email protected]
Serving: Herkimer, Jefferson, Lewis, Madison, Oneida, Onondaga, Oswego, St. Lawrence counties
STATEWIDE AUDIT - Ann C. Singer, Chief Examiner
State Office Building, Suite 1702 • 44 Hawley Street • Binghamton, New York 13901-4417
Tel (607) 721-8306 • Fax (607) 721-8313
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Office of the State Comptroller
Office of the New York State Comptroller
Division of Local Government and School Accountability
110 State Street, 12th Floor • Albany, New York 12236
June 2015